Over 1.5 billion people live in countries whose economies are dependent on the revenue from natural resource exports. With growing demand from China and other emerging markets, the demand for minerals and oil will continue to increase. And prices will increase even further in response to the accelerated depletion of these non-renewable resources. What effect will mushrooming reliance on oil and minerals have on commodity exporters’ politics, legal institutions, and economics?

Conventional wisdom says that, over the long run, the results will be devastating. Increased natural resource reliance will promote authoritarianism, corruption and the weakening of the rule of law, economic stagnation and even war. This definitely seems like more than what these countries bargained for when they were ostensibly blessed by the gods of oil and precious metals.

The idea of a resource curse can be found in academic writings ranging from country case studies of oil and mineral reliant states, such as Iran and Nigeria, and large-n statistical analyses. It has also spread beyond academia. Several country case studies, policy papers produced by multilateral aid organizations, popular books on world politics and economics, and articles in the mass media, have been seduced by the idea that there is a resource curse. While well-respected magazines such as The Economist continue to run frequent special reports on this phenomenon, perhaps the most well-known popularization is New York Times columnist Thomas Friedman’s so-called first law of petropolitics: the claim that recent turns toward authoritarianism in Russia, Venezuela, and Iran have been induced by big increases in the price of oil. Moreover, the scope of the policy prescriptions espoused by resource curse advocates has been ambitious, matching the sweeping claim that oil and mineral wealth is universally bad for countries’ political and economic development. Some scholars have gone as far as to recommend that countries that discover oil and precious metals are better off leaving their resources in the ground—a policy that, unsurprisingly, resource rich countries have eschewed so far. Many have a good reason to do so: they are poor, and can ill-afford to simply leave the “big bills” associated with minerals and oil “on the sidewalk.”

Despite overwhelming consensus, there is reason to be skeptical of the resource curse theory. Over the past few years, Stephen Haber and I have researched this issue extensively. Unlike other research on this topic, we have looked at the historical trajectory of resource-reliant countries and conducted before-and-after comparisons, in order to see if the discovery and increased production of oil and minerals had any effect on countries’ political institutions; we have also compared these countries to non-resource reliant countries that were similar to them on the eve of resource discovery, save for reliance on oil and minerals. We were surprised to learn that, upon closer inspection, there really is no there there!

Indeed, take a look at the time-series graphs for Australia, Canada, and the United States below: they have historically enjoyed some of the highest levels of income from natural resources per capita (well-above the historical global mean).

Source: Haber and Menaldo (2010). Total Natural Resources Income is: Total Fuel Income plus Total Metals Income in Real 2007 dollars.

We know that these countries have been consistently liberal democracies, even in the face of increased income from natural resources. On the economic front, Gavin Wright (and coauthors) has written extensively about the fact that the United States’ industrial revolution was bankrolled by its absurdly generous endowments of copper, iron ore, antimony, magnesite, mercury, nickel, silver and zinc, and, of course, petroleum. He further argues that these endowments did not fall from the sky like manna from heaven; US resource wealth was instead engendered by a conspiracy of political and legal factors: a favorable legal environment, engineering prowess, and a favorable business climate that rewarded otherwise risky investments in knowledge and technology.

Also, consider Chile, the world’s largest copper producer. A consolidated democracy, it is the wealthiest country in Latin America (it’s fast approaching $15,000 Real Per Capita GDP). These attributes undoubtedly contributed to its ability to rescue the 33 miners that were trapped inside one of its modern and productive copper mines.

Percent of the Global Copper Market, 2006

Source: Haber and Menaldo (2010).

CONCLUSION

When it comes to the claim that there is a Resource Curse, does the Emperor have no clothes?

10 comments

Law of petropolitics is an unnecessary complication of a simple phenomenon. When resource wealth increases, more and more people in those countries have a stake in the political and economic stability of the country. To ensure that stability, they choose authoritarian rule over an unstable democracy. Over time, once their people are more educated and seek political changes in their countries, authoritarian one-man rule will give way to democracy.

Extremely short-sighted argument, Stephen and Victor. US, Canada and Australia had established their liberal governance structures and supporting institutions before they became heavily dependent on the extraction of natural resources. Establishing these norms, cultures of open expression and rule of law that ensures these has been critical to the dispersion of wealth resulting from natural resource extraction. The Natural Resource-curse arguments have always said that the flaw, for countries such as Nigeria, Venezuela, Saudi Arabia, Iran, etc is that the democracy/debate institutions have not had the opportunity to develop, act and flourish independently of the governing parties that have opened their countries to resource extraction.

[...] The Resource Curse: Does the Emperor Have No Clothes? – Plawtoic – Over 1.5 billion people live in countries whose economies are dependent on the revenue from natural resource exports. With growing demand from China and other emerging markets, the demand for minerals and oil will continue to increase. And prices will increase even further in response to the accelerated depletion of these non-renewable resources. What effect will mushrooming reliance on oil and minerals have on commodity exporters’ politics, legal institutions, and economics? [...]

If a country discovers large reserves of oil (for eg), then doesn’t that country’s currency tend to appreciate (assuming currency is allowed to float) and doesn’t that then make their non-oil exports far less competitive? I.e., while some “resource curse” advocates are looking at correlation rather than causality, is it not fair to say that there are indeed negative externalities as a result of resource discoveries?

thx for the insight and great blog entry. looking forward to your thoughts on this.

So your argument is a couple of resource abundant countries have done well, hence, no resource curse? You have only succedeed in showing that not all countries with natural resources succumb to the curse, a position that no-one would argue for. This is why we have statistics. A couple of anecdotes do not prove a general point.
I haven’t looked at the actual papers, where you presumably actually argue for your thesis. But this post could hardly be less convincing.

Haber and Menaldo consistently fail to appreciate the role of institutions for controlling extractive wealth. The natural resource curse, better described as a “rentier effect”, is robust on the large-n level for nations with a significant proportion (1/3 or more) of GDP deriving from extractive wealth. Nations with more diversified economies, like Chile, Australia, and the US, do not experience a rentier effect because government revenue is not dependent on a single extracted commodity. Haber and Menaldo’s papers are no more convincing than this post.

[...] economic growth success, yet why were their two bad decades so very, very bad?Victor Menaldo on THE RESOURCE CURSE: Does the Emperor Have No Clothes?Alex Evans on THE RESOURCE CURSE: Does the Emperor Have No [...]

[...] The Resource Curse: Does the Emperor Have No Clothes? – Plawtoic – Over 1.5 billion people live in countries whose economies are dependent on the revenue from natural resource exports. With growing demand from China and other emerging markets, the demand for minerals and oil will continue to increase. And prices will increase even further in response to the accelerated depletion of these non-renewable resources. What effect will mushrooming reliance on oil and minerals have on commodity exporters’ politics, legal institutions, and economics? [...]